Where to Find Safe Yields Above 1%

Now that the Federal Reserve has hiked interest rates three times in the past 16 months—including twice in the past four months—the interest that investors can earn on their cash is starting to get real.

There are now plenty of options for earning safe yields above 1% for investors who hunt around. The best interest rates are most readily available from banks, but there are some high-minimum money-market funds, such as Fidelity Money Market Portfolio (ticker: FMPXX), that yield above 1%.

“They are going to get more company in next couple of months,” as the impact of the recent Fed hike is fully realized and the Fed prepares to hike again, says Peter Crane, of money-fund research firm Crane Data. “Things look better for cash investors than they have in a decade.”

Several bank savings accounts yield over 1%, including ones offered by PurePoint Financial (1.25%), My Banking Direct, and Popular Direct (both 1.15%), according to Bankrate.com. The best value in safe yields is a 12-month certificate of deposit, says Greg McBride, chief financial analyst at Bankrate.com. Connexus Credit Union is offering a CD yielding 1.5%; Banesco USA, 1.45%; and Live Oak Bank, 1.4%.

Long-term savers should consider creating a ladder of CDs at different maturities so the shortest-term can be rolled over to take advantage of rising rates, suggests Kathy Jones, chief fixed-income strategist at Charles Schwab. These accounts are federally insured up to $250,000 per account.

For investors, a money-market fund makes more sense as a place to stash “dry powder” that can be readily deployed. Yield gains, however, have trailed Fed rate hikes. The largest money funds have an average yield of 0.6%, just 10 basis points (or 0.1 percentage point) more than before the Fed’s mid-March 25-basis-point rate hike. Many funds hold 30-day securities, and the rate hike is just two weeks old. “Ten more basis points will come through,” Crane says. “Whether we ever get the other five is unclear.” Fund companies have used recent rate hikes to restore fees that were waived to keep money-fund yields from going negative when rates were near zero.

Still, many money-market funds meant for individual investors are getting close to the 1% threshold. Vanguard Prime Money Market fund (VMMXX) has a 0.87% yield. Its tax-exempt cousin, Vanguard Municipal Money Market fund (VMSXX), has a yield of 0.7%, which is more than 1% on a tax-equivalent basis for many. The next Fed rate hike could come as soon as June, and Crane thinks that short-term debt markets will start to price it in ahead of time.

UNTIL THEN, INVESTORS willing to take slightly more risk can easily find yields well above 1% among ultrashort bond funds.
Pimco Enhanced Short Maturity Active
exchange-traded fund (MINT) is a popular choice. It has returned 2.25% in the past year and has a 1.36% yield. It holds a lot of floating-rate instruments, so the yield should keep pace with Fed rate hikes, says Jerome Schneider, who heads short-term portfolio management at Pimco. Next step for risk is
Pimco Low Duration Active
ETF (LDUR), a global short-term bond fund that yields over 2%. “They are very complimentary,” says Schneider, who recommends that investors diversify their defensive holdings.

Unlike money-market funds, the net asset values of ultrashort funds float, which means that loss of principal is a possibility. They are safe and liquid, but there is a lot of variation in strategies and risk levels, warns Roger Merritt, who heads the funds-rating group at Fitch Ratings.

The best way to judge interest-rate risk is to check the fund’s duration, a risk measure expressed in years. As a general rule, a fund’s duration shouldn’t exceed your investment time frame, says Jones. In other words: Need that money to buy a house in a year? Don’t put it in a fund with more than a one-year duration.

Now that the Federal Reserve has hiked interest rates three times in the past 16 months—including twice in the past four months—the interest that investors can earn on their cash is starting to get real.

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